Yahoo Finanza Are Sun.King Power Electronics Group Limited’s (HKG:580) High Returns Really That Great?
Today we'll evaluate Sun.King Power Electronics Group Limited (HKG:580) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Sun.King Power Electronics Group:
0.10 = CN¥180m ÷ (CN¥2.6b - CN¥837m) (Based on the trailing twelve months to December 2019.)
So, Sun.King Power Electronics Group has an ROCE of 10%.
Check out our latest analysis for Sun.King Power Electronics Group
Is Sun.King Power Electronics Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Sun.King Power Electronics Group's ROCE appears to be substantially greater than the 7.8% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Sun.King Power Electronics Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Sun.King Power Electronics Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Sun.King Power Electronics Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Sun.King Power Electronics Group's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Sun.King Power Electronics Group has current liabilities of CN¥837m and total assets of CN¥2.6b. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Sun.King Power Electronics Group has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Sun.King Power Electronics Group's ROCE
Sun.King Power Electronics Group's ROCE does look good, but the level of current liabilities also contribute to that. Sun.King Power Electronics Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
